Abu Dhabi National Oil Company for Distribution PJSC (ADNOCDIST) Earnings Call Transcript & Summary

Good day, and welcome to the ADNOC Distribution Q1 2022 Earnings Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Athmane Benzerroug. Please go ahead, sir.

Thank you very much, ma'am. So good afternoon, ladies and gentlemen, and welcome to the ADNOC Distribution First Quarter of 2022 Earnings Conference Call. I'm Athmane Benzerroug, the Chief Investor Relations Officer. Joining me today are Bader Saeed Al Lamki, our CEO; and Mohamed Al Hashimi, our CFO. In today's call, I will quickly cover the key highlights for the first quarter of this year and the 2022 outlook. Our CEO will then discuss in detail progress on our growth strategy. And then our CFO will take you through the Q1 2022 operating and financial performance. We will answer any questions you may have at the end of this presentation. So before we begin, I will quickly reiterate our cautionary statement regarding forward-looking statements. This presentation includes forward-looking statements relating to our business. Such statements involve a number of factors that could cause actual results to differ materially from our expectations. For more information, please refer to the international offering memorandum relating to our IPO and in our other investor communications, all of which are available on our website. So I will now go through the summary of the company's key achievements for the first quarter and provide some insight on the 2022 outlook. So regarding the Q1 2022 achievements. So ADNOC Distribution made a positive start to the year, as you have seen in our numbers published this morning with a robust performance and the highest ever recorded first quarter's fuel volume. So compared to Q1 2021, total fuel volume increased by around 11%, thanks to expansion of our network, higher traffic in our stations and a continued rebound in economic activity in the UAE. So in Q1 2022, the company demonstrated also a strong earnings momentum compared to Q1 of last year with an EBITDA growth of nearly 8% and the net profit growth of around 6%. The nonfuel business witnessed an 11% growth in the gross profit in Q1, driven by a higher number of transactions and an improvement in margins by 1.3 percentage points compared to the same period of last year. So all segments of nonfuel business demonstrated a positive momentum in the reporting period following the improvement of customers' offers in lubes and the car wash businesses, as well as the opening of new vehicle inspection centers in the last quarter, so in Q4 2021. Our convenience stores which account for roughly 40% of the gross profit of the non-fuel retail demonstrated a positive momentum in the reporting period following the improvement of customer offers, as I was mentioning. And also we saw in the convenience stores a higher footfall and improved margins as a result of the revitalization strategy to offer a modern, digitally enabled customer journey and in-store experience through a better product mix and introduction of fresh food and coffee products. Finally, the company continues to maintain robust cash flow generation and strong balance sheet to support future growth opportunities and sustain attractive shareholder returns. Regarding the outlook, we are making good execution progress on our smart growth strategy and expecting a positive outlook and earnings momentum in both the fuel and the nonfuel businesses to continue in 2022 and beyond. So we are on track to execute growth commitments and reach the minimum target of $1 billion EBITDA by 2023. So we expect the delivery momentum to continue both domestically and internationally and fuel volume growth to sustain this year. So we are on track to open 60 to 80 new stations, which includes 20 to 30 new stations in the UAE, as mentioned earlier and 40 to 50 new stations in international markets. So our network in the Kingdom of Saudia Arabia increased by 40% in 1 quarter, reaching 55 stations. Our nonfuel business growth will be driven by our commitment to continued focus on improved category management, fresh food and hot beverages. So we will continue to invest in offering our customers a modern and engaging retail experience in our C stores, car wash, lube change services in line with our ambitious nonfuel strategy. So we expect on that front to refurbish 40 to 50 more convenience stores in 2022 after 50 in 2021. Also, we are a, ADNOC Distribution, one of the leading UAE-based company. And we believe that we have a key role to support energy transition that is spread by the United Arab Emirates. To this point, the company is leveraging its extensive network to promote EV charging and clean energy to further enhance customer experience. We will share further details on our plans in due course. Finally, on our OpEx, we maintain our commitment of achieving further operational excellence and expect like-for-like OpEx savings of around $25 million over the next 2 years after we have met already our target of like-for-like OpEx savings of between $100 million and $150 million over 2019-2023 by achieving a like-for-like OpEx savings of more than $100 million over 2019 and 2021. Finally, we are committed to delivering attractive long-term shareholder returns to our shareholders. So we have a solid business model, strong cash flow generation, financial position and growth potential, allowing for setting an attractive dividend policy that yields visibility of cash returns. So in line with our approved dividend policy, our shareholders approved in March a cash dividend of $350 million for the second half of 2021, which was paid in April 2022, and our CFO can comment on this afterwards. That brought the total cash dividend for the fiscal year of 2021 to $700 million or 20.57 fils per share. So for 2022, our dividend policy sets a dividend amount of minimum $700 million, which a dividend -- with the dividend equal to a minimum of 75% of distributable profits for 2023 onwards, subject to the -- to our shareholder approval. So finally, the company has been included in the blue chip equities index, FTSE ADX 15 joining the biggest and most liquid listed companies on the Abu Dhabi Stock Exchange. I guess it was worth also mentioning this achievement. I will now also quickly tell you what has been the development on the environmental, social and governance front. We have set appropriate governance controls to oversee and monitor our sustainability performance. We have already established a sustainability committee, which is chaired by our CEO, Bader Al Lamki. And he is responsible to drive targets along with implementation and monitoring of our sustainability strategy. So we have key objectives under each of the sustainability strategic framework pillar, and we will communicate our midterm and long-term goals over the coming quarters. So we are taking the following steps. One is reducing energy consumption across our operations by adopting more efficient technologies, smart metering and utilities, install more solar panels at our stations that would change the energy mix towards clean power, and we expect to share more details on these targets and the road map to achieve our targets in due course, as I mentioned earlier. So I will now hand over to our CEO, who will walk you through an update on our growth strategy. Thank you.

Thank you, Athmane, and good afternoon, good morning, everyone. Thank you for joining us. Today, I will take you through the progress we have made to achieve our growth plans. Let me begin first by addressing our pillar of growth, our -- the first pillar of growth, which is the fuel business, which includes retail and commercial businesses. As highlighted by Athmane, our total volumes in Q1 2022 recorded 2.5 billion liters, the highest ever first quarter volumes following the increase of 11% year-on-year. Our retail volumes were up by 10%, and our commercial volumes increased by 12%. This growth was a result of the ongoing economic growth, the easing of travel restrictions globally, as well as the impact of Expo 2020 in Dubai. In addition, the company expanded -- continue to expand in Saudi Arabia by adding stations resulting in incremental fuel volumes in Q1 2022 compared to the same period of 2021. We expect that the fuel volumes will continue to increase in 2022, driven by expansion in domestic and international markets as well as supported by ongoing economic growth. We have already marked a number of milestones in the first quarter of this year. This was achieved by opening 18 new service stations across the UAE, Saudi Arabia, as well as launching of new products and enhancing of services. On the domestic network, we maintained a leading market position in the UAE, in the UAE'S retail fuel sector, and now we're operating 464 fuel stations across the UAE with the addition of 3 new stations in the first quarter of this year. Dubai market offers significant potential, as you know, for the company to grow volume and is at the heart of our smart growth strategy. We remain focused on high-quality strategic locations in Dubai. And there are currently 11 stations in various stages of execution with additional pipeline of 10 more stations already approved for further development. Adding 15 new stations in Q1 2022, taking our total network stations in the Kingdom of Saudi Arabia to 55 stations. We have continued to execute our plans in the Kingdom of Saudi Arabia by adding a number of stations in April, increasing -- a number of 16 stations in April, which is a remarkable achievement already. This progress is set to continue and to accelerate throughout the year. We are well on track to deliver 60 to 80 new stations across the UAE and international markets by the end of this year. This is just the beginning of our growth journey in the international market, and we are advancing our plans to realize international growth opportunities in a disciplined manner. Moving on to the second pillar of our growth strategy, the nonfuel retail business. We continue to deliver on our vision to bring modern digital-enabled shopping experience to the customers and the communities that we serve. All segments of nonfuel business demonstrates -- demonstrated positive momentum and reporting -- in the reporting period following an improved customers' offer and convenience store, lubes and car wash as well as opening of new vehicle inspection centers in Q4 of 2021. On the back of our growth initiatives in the reported period, we've witnessed positive results in our nonfuel retail businesses, especially in our ADNOC Oasis convenience store. We saw a strong growth in transactions and 11% increase in nonfuel gross profit in the first quarter of this year compared to the same period of last year. Other initiatives that are driving this growth in 2022 is the opening of 4 new convenience stores in the United Arab Emirates, increasing our network by more than 5% on year-by-year -- on year-on-year to 350 C stores, the refurbishment of 3 convenience stores, creating a new look and feel and offering fresh food, hot beverages and a wider menu selection is a key enabler to this growth. We are on track to refurbish 40 to 50 stores in 2022. We have also maintained focus on providing an increased level of convenience to our customers through our online delivery services and offering essential products shelf in our stores. Customer experience remains at the heart of our growth plan and a key differentiator to add value -- to add more value to every visit to our customers -- to our customers as they visit our stations. It has been an integral to the companies -- through our integral strategies of the company throughout the first quarter of 2022, without -- we continue offering customer promotions in stores throughout the ADNOC Rewards program. In the first quarter, a series of offers and promotional campaigns were launched in ADNOC Oasis, ADNOC Oasis stores, car wash, lube change, aiming to offer a range of incentives that meet a wide range of customer taste and interests. Our ADNOC Reward loyalty program which was the first program for a retailer in the UAE is also continuing to grow in numbers in the first quarter of 2022 with more than 1.3 million members now enrolled and 83 partners providing discounts and deals through the ADNOC Distribution hub. During the first quarter of 2022, the program was expanded to include a fuel redemption option, whereby customers can pay for their fuel with their ADNOC Rewards points. I will now hand over to Mohamed to present highlights of our financial performance.

Thank you, Bader and Athmane. Good morning and good afternoon, everyone. I'd like to now take you through our financial results for the first quarter of 2022. So we have delivered strong performance, while we continue to execute on our growth plans and maintain a strong balance sheet. Our revenues, as you can see, have increased by slightly over 57% in the first quarter of the year again compared to Q1 of last year. Now this is a result of growth, both in fuel volumes and nonfuel sales. And of course, this is additionally supported by higher prices at the pump as a result of higher crude oil prices. Looking at our gross profit, it's gone up by almost 9% compared to the same period as last year, again, mainly driven by higher fuel volumes, as well as the growth in the nonfuel retail business. And last but not least, inventory gains as well. So when we discuss the business-wise performance in the next few slides, I will elaborate further. The reported EBITDA has grown by nearly 8% year-on-year to USD 240 million, once again driven by higher fuel volumes, higher nonfuel retail business and inventory gains. Our net profit for the year Q1 2022 was USD 183 million. This is an increase of 6.3% compared to the same period as last year. Let's quickly cover some of the key operational highlights. The Q1 2022. Total fuel volumes demonstrated strong growth. They've increased by almost 11% year-on-year. As highlighted by Bader earlier, our retail fuel volumes, which make up approximately 67% of our total fuel sales, these have gone up by almost 10% in Q1 '22 versus Q1 2021. Again, this was primarily driven by the improved economic activity, easing up of mobility restrictions and the new stations that we have added to our network. The commercial fuel volumes increased by 12% year-on-year in Q1 2022, again, supported by a 19% year-on-year growth in the corporate volumes. Now this was partially offset by a lower uptake from our strategic aviation customers, but the growth in corporate volumes was partially driven by the signing of new sales agreements, which we were able to confirm in the final quarter of 2021. Our consistent focus on profitable growth translated into higher gross profit of the corporate business that we will see in the next slide. Looking at our nonfuel business, we witnessed a very healthy 20% year-on-year increase in transactions. For the convenience store part of the business, the average gross basket size showed a decline of 5% in the first quarter of 2022 compared to the same period last year. But this comes after a double digit growth seen during the peak of COVID-19 pandemic, which, of course, was driven by shifting consumer behavior, meaning customers were visiting less but buying more a niche transaction. Now after the partial normalization of this trend, the basket size still remains above pre-pandemic levels. This is at the -- as Bader pointed out, this is driven by customer-centric initiatives, a number of these, which we've undertaken in our business. Moving on to the gross performance by segment. Our 2022 first quarter gross profit increased by 9.3% year-on-year. As I mentioned before, this was mainly a result of higher fuel volumes, growth in the nonfuel part of our business. And last but not least, inventory gains. If you look at the fuel retail gross profit, this has gone up by almost 13% year-on-year, again, driven by higher fuel volumes, higher number of transactions slightly higher inventory gains in first quarter of '22 than the first quarter of 2021. On the nonfuel retail side, the gross profit increased by more than 11% as compared to the first quarter of last year, driven by 2 factors: more transactions, more nonfuel transactions and improvement in margins. So our convenience stores revenues increased by 17% year-on-year, and the gross profit increased by almost 22% year-on-year in the first quarter of 2022. Now as mentioned by our CEO earlier, this was driven by our growth strategy to optimize the product mix. And this has resulted in an increase in sales of fresh food and premium beverage coffee products. On the commercial business side, the gross profit increased by almost 2%, again, driven by higher corporate volumes, but this was partially offset by lower aviation fuel volumes. If we look at the segmented EBITDA, the first quarter EBITDA increased by nearly 8% year-on-year. This was, again, mainly a result of higher fuel volumes, inventory gains despite slightly higher operating expenditure. The retail EBITDA has gone up, increased by 12% year-on-year, again, higher volumes and inventory gains and the commercial EBITDA remained stable on the back of lower aviation volumes, slightly higher operating expenditure but partially offset by higher corporate volumes. On the operating expenditure portion. In the first quarter of the year, our total OpEx, excluding depreciation, increased by 8% compared to the same period of last year. This was after an increase in the company's network, both domestically as well as internationally and associated staff expenditure. But we continue to implement management initiatives to increase operational efficiencies across every business unit. We want to maintain prudent control over the expenditure and optimize staff costs with the more efficient deployment of staffing levels, both for the stations as well as the convenience stores. Now we've executed well ahead of schedule our commitment to the market. On the like-for-like operating expenditure savings between USD 100 million to USD 150 million from 2019 until 2023, we have already achieved USD 103 million between 2019 and 2021. Having said that, however, we remain fully committed to further our transformation efforts, which is going to ensure that operating expenditure remains at market competitive rates and the company remains well positioned to deliver on its future growth ambitions. So for the period covering 2022 and 2023, that's this year and next year, we plan to achieve an additional USD 25 million in like-for-like savings. Looking at the cash generation, we've demonstrated a strong free cash flow of USD 508 million in the first quarter of the year. This was driven by robust underlying profitability and a positive impact of change in working capital. In line with plans to continue with our expansion strategy, we've spent capital expenditure of USD 54 million during the first quarter alone. We further strengthened our financial position with a net debt-to-EBITDA ratio of 0.46x compared to 1.06x at the end of 2021 and well below our commitment to the market of 2x. Our solid robust balance sheet position offers more than sufficient room to invest in growth and sustain both a progressive as well as an attractive dividend policy. Now let me hand it back over to Bader.

Thank you, Mohamed. Before opening the floor for the Q&A, I would like to reiterate our outlook. ADNOC Distribution continues to offer a compelling investment story. We had a positive start of the year with strong results and expect earnings momentum to sustain in 2022 driven by both fuel and nonfuel businesses. We remain committed to pursue our expansion plans and allocate capital towards growth in a disciplined manner, deliver an enhanced customer experience, further optimize our operations to become a leading cost-efficient fuel retailer and generate sustainable value growth for our shareholders. Our domestic and international expansion momentum is likely to accelerate in 2022. Finally, we remain committed to delivering an attractive dividend payback backed by the strong balance sheet that we have and confidence in the cash flow generated -- generation capacity while retaining sufficient cash towards our growth ambition. This concludes today's presentation, and we are happy to take any questions.

Operator, we can take the questions. Thank you.

[Operator Instructions] Please go ahead.

This is Faisal Azmeh from Goldman Sachs. I just have 2 questions on my end. Maybe the first is with regarding to your cost efficiency program. In light of the inflationary environment, do you see your target still achievable? And maybe just a question relating to this, as we kind of look at your total number of stations that you have today, is there room to optimize some of these stations that you have in Abu Dhabi, in the sense that it would effectively allow you to capture some cost savings there. When looking at the volumes that you've achieved so far compared to pre-pandemic levels, it seems that the like-for-like on a station basis is still lower than where you were on a pre-pandemic basis. And so does that mean there is room to optimize the number of stations on the Abu Dhabi front in a way that would allow you to make some cost savings as well. So these are 2 different questions, maybe, but they do relate on the cost cutting side. And maybe just a follow-up question on your $1 billion EBITDA target. Do you feel this is achievable organically? Or do you need to do a -- do you need to pursue the bolt-on acquisition strategy to get to that $1 billion target?

So Faisal, Athmane here. So let me take perhaps the first question. The question is about inflation. Correct me if I'm wrong. And what is the impact on our OpEx. I guess that what we have to -- just to say here is that we don't -- we see actually limited impact of inflationary pressure on our costs and also on our margins. The second answer to your question is also related to the inflation at the C stores and the vendors could decide to factor higher costs in the final product setting prices, which should not have actually an impact on our margins. So this is on the inflation front. Your second question was on the Abu Dhabi, so perhaps, Bader, obviously can answer your question on Abu Dhabi.

I think the broader question was optimization opportunities and specifically you talked about Abu Dhabi stations. But first and foremost, we always look at opportunities to optimize and bring in efficiency in our operation with logical and where it makes sense and where it doesn't impact the quality of our service. And that's what allowed us to achieve the OpEx figures that you've seen over the past 3 years since the IPO. Having said that, coming specifically to the Abu Dhabi front, Abu Dhabi is a key market where we are dominant. Definitely, we have a balanced strategy, whereby we need to maintain our spread in this Emirates and continue to provide the service in a way that also retains value for us, while focusing on an offensive strategy in Dubai where we definitely see more value coming in with additional incremental volumes. So we'll keep a good balance in the way we approach Abu Dhabi, where areas are underserved, we'll definitely try to seize and provide that service and not allow competition to creep in. And we do that by adopting our slim OTG on-the-go type of stations and that is more cost effective and also delivers the value that you have in mind. Meanwhile, we are laser focused on Dubai. And as you can see, we do have an ambition to add another 15 -- up to 15 stations this year. And that's the price that we are definitely focused on throughout this year. There was a third question, sorry, Faisal was regarding the $1 billion target, I didn't get the latter part of the question. But definitely, the route and the journey, it was $1 billion, will be a mix of organic and inorganic growth avenues. And that will also be through domestic and international growth avenues and the utilization is on track to deliver that.

[Operator Instructions] We'll now move on to the next question. Please go ahead.

This is Sashank Lanka from Bank of America. I have 2 questions. The first one is, if I look at your fuel retail volumes, they actually fell slightly Q-on-Q, which I'm assuming is because of the Expo impact in Q4 as well as the holiday season. Now with the Expo behind us, can you give us some guidance on how you expect volumes to look specifically in Dubai over the remaining part of the year? Do you expect that the new stations you're opening will kind of offset the peak demand that we -- that is behind us? That's the first question. And the second question is we saw fuel retail margins at almost 53 fils per liter in Q1. I think this is obviously higher than what we saw over the last 2 quarters. So just wanted to understand the reason for that and if this is something that could be sustainable.

So just on the seasonality, perhaps you were just asking about Q1 being lower than Q4, and this is purely an effect of seasonality, if you look historically. The -- so Q4 is a strong quarter, and this is mainly due to the fact that there is much more activity also domestically, but also people coming to the UAE for the festive season, et cetera, and Q1 is less. And a lot of also holidays, et cetera. So people flying to the UAE. I guess what is important to highlight here is that the Q1 volumes this year are the highest Q1 volumes ever. And I guess, this shows you how the growth is catching up in our volumes and numbers. And I'm done with the explanation, I guess, on the volumes. And I guess, Mohamed, do you want to take the question on the margins, perhaps, yes.

Yes. Look, as you rightfully caught on the margin increase, is supported by an improved product mix that we've seen in Q1 2022. And so it's something we alluded to earlier. We rolled out our fuel premiumization campaign, which encourages customers to use premium fuel product that is 98 versus 91 or 95. And our ULG 98 margin, as you may be aware, is almost 50% above the blended 95, 91 margin. In addition to that, the transportation optimization also provides additional margin support. Anything further as it relates to margins or changes to it, we will discuss it in due course.

[Operator Instructions] There are no further questions on the phone at this time.

Just -- sorry, we are just looking at the questions that we have from the web. Just give us a second. Okay. So I guess, we had a question -- so we have a question on what is your definition of distributed profits. So in nutshell the way we are looking at what we can distribute is the net profit plus whatever retail earnings that we have. And anyway, we're looking at the cash that we have in the balance sheet and the cash that we generate every quarter to sustain this dividend policy and also invest in growth. The -- I guess the other question is, what is your expected EBITDA growth in 2022 and 2023? We don't provide any guidance, I guess, that the heads up that we have provided the market is that we see growth in volumes and earnings for -- in Q1, and we believe that this will sustain. And I guess the target that we have is -- a commitment to the market is clear, it's a $1 billion EBITDA target by 2023. So we have also a question regarding the decrease in the aviation business and this is mainly -- this is coming actually from the fact that the volumes of the aviation business are down. Just bear in mind that the aviation business is only -- so we are providing fuel just to strategic customers, i.e., the Army. And also the aviation business just account for 5% of the total volume. So I guess what is important to highlight here is if you look just at how many volumes we have lost in Q1 2021 versus last year in the Aviation business, you are talking about 40 million liters when we have gained in the corporate business more than 120 million liters. I guess this is what is important to highlight. Any further questions? Okay. So question is with 1.3 million members and 83 partners in ADNOC Rewards Loyalty program, do you plan to monetize the platform, further by transforming into a [ super art ] by offering many services? I guess that, look, we are -- you're right, this is -- this app and this loyalty program has been very successful. I guess that with the marketing team, we are working, first of all, to enhance this to make sure that also the redemption program is attractive and can be triggered by our customers. These kind of initiatives that we have launched just recently allow our customers to also really -- to have a discount on the fuel through the ADNOC Rewards by using their points. But I guess that when we will have -- when we believe, sorry, that we are at the major stage we see how we can enhance and how we can monetize this app. But I guess this is internal and what we want at the end of the day is to ensure that this app providing the best kind of service to our customers. Okay. I guess we have no further questions. Operator, do we have any questions in the queue?

Yes. Yes, we have another question on the line, please go ahead.

This is Ildar Khaziev from HBC. I have a question about nonfuel sales, please. So you've reported very strong results in the first quarter. And I was just wondering, if you could give us a sense of how nonfuel fuel sales intensity like in terms of nonfuel spend per liter units of volume, differs between key markets in the UAE, if we look at Dubai, Abu Dhabi and [ Emirates ]. So basically, where is it growing the fastest and whether it was uniform recovery? Or are there any markets which actually performed better than the others? That's my question.

So thanks for your question. I guess, look, as mentioned by our CEO, of course, Dubai is our priority, and we have been successful so far to increase substantially our volumes with now 31 station, where 3 years back, we had no stations. And I guess if you -- we don't disclose, as you know, anything on the volumes [indiscernible]. What we can tell you is that we have seen improvement in our volumes across the board versus last year. This is what I can tell you. But without giving more specific details on each of [indiscernible].

I was -- actually sort of my question was rather about the non-fuel performance. I think you were talking about...

Okay. So on the -- yes, go ahead.

Yes. My question was more about nonfuel sales comparison between different markets, which markets perform the best, I think, at the moment?

Well, I guess, across the board, we have seen good results across our initiatives in the nonfuel retail, especially on the C store. What we can tell you is that, of course, in Dubai, we had a slightly better performance, but this has been mainly driven by the fact that you had Expo, et cetera. So -- and with the tourist numbers. But I would say across the board, what we can tell you is that the initiatives that we have put for the past 1.5 year, 2 years are paying off in -- across [indiscernible].

There are no further questions on the phone. [Operator Instructions] There are no further questions on the phone at this time.

Thank you very much, [indiscernible]. Thanks again, everyone, for attending this call, and please feel free to contact the Investor Relations team and myself if you have any questions. Thank you. Have a nice day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.